America may be running out of houses, but young adults are continuing to set their sights on homeownership.
More than half of them (59%) said they plan to use their pandemic savings on a down payment for a home, according to a recent Zillow survey that polled over 1,200 millennials and Gen Zers. It was the most common answer beyond using their savings for everyday living expenses.
“Even in an unprecedented global pandemic, homeownership still appears to be a priority and aspiration among the sometimes called ‘rent forever generation,'” the report reads.
The survey found that 83% of young adults reported saving money in at least one category during the pandemic. This cohort found themselves on the upside of the millennial wealth gap that the pandemic exacerbated.
Lower-income millennials who were already contending with an affordability crisis had little to fall back on as they experienced job loss and pay cuts. But a higher-earning group with stable income was able to save and invest money they would have otherwise spent in non-pandemic times.
Interest rates hit a historical low in 2020, making it easier for those with enough money saved for a down payment to buy a home. But the combination with the year when many were working from home soon led to a cutthroat housing market, marked by a historic housing shortage and lumber scarcity which both propelled housing costs to several record highs. That has resulted in bidding wars nearly everywhere nationwide, with competing bidders throwing down all-cash bids and higher and higher down payments.
Many millennials able to snag a house did so by paying above market price, while others saw homeownership pushed further out of reach as housing prices skyrocketed and morphed into an inventory crisis.
As Insider’s Ben Winck reported, the lumber shortage has largely made it too expensive to for builders to construct more homes. Housing starts fell nearly 10% through April after surging the month prior, signaling supply won’t bounce back all that soon. Lumber has come down somewhat since from its super-expensive level, though.
Considering that millennials have just reached peaked homebuying age, and some Gen Zers are already househunting, young adults will be driving the housing market for years to come. This survey suggests that wealthier members of both generations will put their pandemic savings toward down payments, so the unequal housing boom may not abate any time soon.
Whether they will be able to find an available house is another question.
Nearly two-thirds (64%) of millennials regret buying their home, a new Bankrate survey that polled 1,400-plus homeowners found. Just over 20% cited expensive maintenance costs as the reason why, while 13% said it’s because they overpaid.
Those reasons come as no surprise in today’s cutthroat housing market, marked by both a historic housing shortage and lumber shortage that have propelled housing costs to an all-time high. It’s resulted in heated bidding wars, where competing buyers are throwing down all-cash offers and offering higher down payments.
The skyrocketing prices and tight inventory is creating new affordability challenges for millennials, who have reached peak age for first-time homeownership. They led the housing market last year, but as the boom turned into an inventory crisis, homeownership fell out of reach for the generation yet again.
Many of those able to snag a house only did so by paying above market price, and some rushed the process in hopes of grabbing something before someone else did.
Consider Stella Guan, who told Insider’s Taylor Borden back in February that she regretted buying a home during the pandemic. Guan, who moved from New Jersey to Los Angeles, said she “wanted to get things done fast” and made seven or eight offers before one was finally accepted. Guan thought she landed her dream ranch-style home, saying she thought she got lucky since there was “somehow no counteroffer.”
But the home had black mold, and repairs cost way more than planned. She budgeted $30,000 to fix up the property but ended up paying upward of $50,000 to overhaul the house. While Guan planned to update the home to her tastes, she said: “I spent all my money on repair and not renovation.”
Unable to lure a new buyer, so she sold to an iBuyer and recouped only 50% of her money. She said the state of the housing market can push people into regrettable decisions.
Homeownership isn’t always as it seems
Guan isn’t the only one who found home improvement costly, per findings from BofA Research’s sixth annual millennial home improvement survey.
It found that millennials are more likely to buy a fixer-upper than a new home, and that some are using loans more frequently than cash to fund home improvement projects exceeding $10,000. When BofA last conducted the survey in 2017, only 34% were using loans for home improvement. Today, 42% of respondents are.
Other first-time homebuyers are increasingly making offers on houses they’ve shopped for online and through social media. While the move is second nature for a digitally savvy generation, it also proved to be an easier and less time consuming process for those buying a house in an area they’re not currently residing in and a way to move swiftly when houses are flying off the market. But some may be realizing their new house isn’t all it seemed to be behind the screen.
As Thao Le, a professor of housing economics and real-estate finance at Georgia State University, told Borden, “The trajectory of the pandemic, and thus the economy, is still very much unpredictable.” She added that before committing to homeownership, “aspiring buyers should evaluate their financial situation and job security carefully.”
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It’s bad news for many aspiring homebuyers – but especially for millennials. It’s just the latest chapter in a long line of bad economic luck.
Daryl Fairweather, chief economist at Redfin, told Insider it’s unfortunate the generation that suffered from the last housing crisis – entering the job force in the middle of a recession – is now facing a different kind of housing crisis. “Now that they have [somewhat] economically recovered and are looking to buy a home for the first time, we’re faced with this housing shortage,” she said. “They’re already boxed out of the housing market.”
The shortage is a result of several things: contractors underbuilding over the past dozen years, a lumber shortage, and the pandemic itself. It comes at a time when millennials have reached peak age for first-time homeownership, according to CoreLogic, leading the housing recovery. But such increased millennial demand has exacerbated the shrinking housing inventory.
While CoreLogic says millennials are set to drive the housing sector for a long time to come, they won’t have an easy time of it if skyrocketing prices and tight inventory create new affordability challenges. Just as homeownership fell within their grasp, it’s slipping out of their fingers yet again.
Chief among the latter has been the price of homes. By 2018, millennials buying their first home were paying 39% more than boomers did at the same age nearly 40 years ago. The increasing cost of a down payment made it even more difficult for millennials, already struggling to build wealth, to save.
Then came the 2020 housing boom.
Millennials led all generations in homebuying last year, according to Apartment List’s Homeownership report, accelerating a five-year trend in millennial homeownership rates rising the fastest. The millennial homeownership rate climbed to 47.9% from 40% just three years ago, per the report. The Jefferies note also highlighted that homeownership rates have increased among those ages 25 to 29 and especially accelerated for those ages 30 to 34. The same note also noted the underbuilding of homes dating back to the Great Recession.
“We’ve been underbuilding for years,” Gay Cororaton, director of housing and commercial research for the National Association of Realtors (NAR), told Insider. She said the US has been around 6.5 million homes short since 2000 and is currently facing a two-month supply of homes that should look more like a six-month supply.
There have been 20 times fewer homes built in the last decade than in any decade as far back as the 1960s, according to Fairweather. She added that’s not enough homes for millennials, who are the biggest generation, to buy.
The pandemic and a lumber shortage worsened the situation
Further driving the housing scarcity is the pandemic itself. Some owners aren’t listing their homes as a safety precaution, Cororaton said. Others are wary of putting them on the market for fear of being unable to find an affordable replacement to buy.
Cororaton said there might have been more homes on the market absent a historic lumber shortage. Lumber factories shut down almost immediately last March due to safety restrictions. When the housing market opened up, Americans bought more new houses than the lumber industry could keep up with. As demand spiked, lumber prices jumped by almost 200% since April 2020. It led to an average unexpected price increase of $24,000 for new homes in the past year, per NAR, one aspect of a nationwide record-high rise in housing prices.
Home prices have been shooting up for years, at a steeper rate than they did ahead of the Great Recession. But the national median home-sale price hit a new high of $353,000, per Redfin. Housing prices are up 18% year-over-year, Fairweather said: “I don’t see values going down at any point.”
The shrinking housing inventory further inflamed a market already hot with demand, sparking cutthroat competition. The typical house is getting snatched up in less than a month as aspiring homebuyers find themselves in bidding wars, putting in all-cash offers, and offering higher down payments.
Cash sales have increased from 18% to 23% in the past year, and first-time home buyers are more likely to put down a full 20% down payment than they were last year, according to NAR. “Because the market is so tight, you want to sweep in and make your offer more attractive,” Cororaton said, adding that a 20% down payment is more appealing to the seller because it signifies financial capability.
Every home sold in March saw nearly five offers on average, compared to two offers in 2019 and 2020 at the same time. Seeing some houses with multiple offers, some buyers on tight budgets aren’t even bothering to jump into the bidding war.
Losing an avenue for building wealth
A heated market running low on homes and high on competitive demand has ultimately set a new pricing precedent that is pushing homeownership further away for many first-time buyers. Although the wealthier cohort of the millennials may be better positioned to buy a home, even those who successfully managed to scrape together some savings are facing dwindling chances of homeownership.
Owning a home is a traditional way of building wealth through equity, but the increasing cost of such an investment is eliminating such an opportunity for many. This is particularly troubling for millennials, some of whom already have less wealth than past generations at their age. Losing housing as a wealth avenue could further widen the generational wealth gap between them and boomers, adding to the vicious cycle of millennial economic woes.
“The bottom line is, [homeownership is] going to be more difficult for millennials,” Cororaton said, adding that some of them are still dealing with debt.
Contractors need to ramp up new builds if they want to satisfy growing millennial demand, per Jefferies – as many as 1.7 million to 2 million new homes per year, maybe even more to fully repair the imbalance. Housing starts rose to 1.7 million in March, but Cororaton said building new homes is also the beginning of addressing the housing issue.
New-construction homes can be expensive for buyers. While an increase in supply would relieve pressure on prices, she said, down-payment assistance would be helpful. And when more homes are built, she added, we should allow for higher density housing, which would mean changing zoning laws and regulations. But as she put it, “that’s easier said than done.”
While builders are doing everything they can to build so they can take advantage of a hot housing market, Fairweather said, challenges like the lumber shortage, a lack of skilled labor, and shipping shortages – affects the appliances that going into a home – aren’t helping.
“All the shortages right now are definitely not helping us figure our way out of the hole, but even without those challenges, the hole is humongous,” Fairweather said. “So it’s going to take decades of building lots and lots of homes.”